Mortgage backed securities managed to post modest gains yesterday in very light trading.   All markets, from stocks to treasuries, are at tipping points, in search of new direction.  Is the recession over or are we doomed to stagnate?  That is the questions market participants need answered.   Some economic reports have hinted that the  worst is behind us while others indicate a recovery will be a long drawn out process  With the direction of our economy being an unknown, markets are in waiting mode.  What is your opinion on the state of our economy?

Today we only have one scheduled money moving event.  At 1pm eastern, the US Treasury Department will auction $35billion in 3 year treasury notes.  The added supply of debt on the market is applying pressure on treasury yields to rise to attract buyers.  With the supply already known, the more important aspect of today’s auction will be the demand especially from indirect bidders.  To measure the success of treasury auctions, market participants look for high demand from these foreign accounts.    A successful auction has the ability to positively affect MBS while a poor auction can cause MBS prices to move lower which increases mortgage rates.   The last auctions which took place only 2 weeks ago saw very high demand which helped to push MBS higher in price which reduces mortgage rates.  Apparently, foreign accounts still have a great deal of appetite for our nation’s debt.  Matt and AQ will cover the auction results today on their MBS Commentary blog. 

On days with little to no economic data, MBS will take their directional guidance from benchmark debt markets.   The problem is all markets are looking for direction but they have nothing to provide guidance today.  I suspect until the auction happens, mortgage rates will remain range bound.  Today’s auction will not have as big an impact on MBS as tomorrow’s 10 year auction will unless it significantly disappoints or is much better than expected.   This is due to the length of the note being auctioned.  The average life of a new mortgage loan is much closer to a 10 year Treasury note than a 3 year Treasury note thus making the 10 year auction much more relevant to mortgages. 

So far this morning, MBS are holding near closing levels from yesterday.  The benchmark 10 year note, after moving higher in yield in overnight trading, is starting to move lower approaching yesterday’s close of 3.50.  For MBS to post any kind of sizable gains today, two things must occur.  First, the stock market will  have to move lower which would push the flow of money to treasuries and MBS.  Second, we need treasuries to move lower in yield and interest rate volatility to calm .  As treasury yields move lower, they make MBS more appealing due to the higher rate of return they offer relative to Treasury investments.

Early reports from fellow mortgage professionals are indicating the par 30 year fixed rate mortgage remains in the 5.00% to 5.25% range for the best qualified consumers.  For consumers wanting a 15 year fixed rate mortgage, you can expect a par rate between 4.50% to 4.75%.  In order to qualify for these rates you will need a FICO credit score of 740 or higher(15 yr need a 620), a loan to value 80% or less and pay all closing costs including 1 point loan origination/discount/broker fee.